Wednesday, January 12, 2011


The Beige Book reported moderate economic expansion. The market's reaction was nil.

A Return to the Past

Do you know Lou Manheim? He is one of the greatest investment philosophers of all time. Here are some of his pearls of wisdom:

* "Stick to the fundamentals. That's how IBM and Hilton were built. Good things, sometimes, take time."
* "The worst mistake we ever made was letting Nixon get off the gold standard."
* "Kid, you're on a roll. Enjoy it while it lasts, 'cause it never does."
* "Man looks into the abyss, and there's nothin' staring back at him. At that moment, man finds his character, and that's what keeps him out of the abyss."

Of course, Lou Manheim was the character played by Hal Holbrook in the original Wall Street movie. Manheim was the old veteran who had been through the one of the worst periods in the equity markets' history, 1966 to 1982. The equity indices went nowhere for over a decade. The Dow Jones Industrials went over 1000 for the first and a brief period of time in January and February 1966; it was not until November 1982 that the Dow Jones went back over the 1000 level for good. For 16 years, the market went nowhere.

We lost an entire generation of investors to the Great Depression. We regained them in the post-WWII global economic boom that lasted through the early 1960s. In 1982, a new investor class was cultivated ... until they were sent into their own financial diaspora after the tech bust of 2000. From 2000 until 2010 we destroyed another generation of stock investors and sent them to the fixed-income markets. The void left us with Internet-based traders, technicians and hedge fund gunslingers who fed on bearish sentiment, volatility, lack of liquidity and investor apathy.

I hope they enjoyed it while it lasted.

In 2008 we looked into the abyss. In 2010 we ended the decade-long equity doldrums while concurrently ending the nearly three-decade-long bull market in bonds. Here it is 2011, and fundamentals matter once again.

Too many market participants relied on 2000-2010 as the new normal or a paradigm change in the equity markets. The art of fundamental investing and financial statement analysis was lost. History will prove that like 1966-1982, the period 2000-2010 will just be another protracted bear market that is going to be followed by a period of global economic growth and equity investor interest.

Understand that in every economic expansion, there will be winners and losers. There will be challenges of economic, political and military proportion. It won't be easy, and it won't be in a straight line. A crisis is bound to come, just like the crash of 1987. We are seeing the next IBMs and Hiltons being built -- AAPL is a great example. We will also see the destruction of household names that will succumb to technological innovation, changing consumer behavior or bad management. In the last bull market, Woolworth was replaced by WMT as the largest general merchandise retailer. I can foresee a major newspaper meeting its demise this decade.

Get ready -- the 2010s will mark a return to our economic and financial past. I would not even rule out a return to the gold standard.

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